Your Dealership Backbone - Have You Made It As Strong As It Should Be?

The same philosophy applies to the dealership when you have a service department, parts department, body shop or all three. The fixed operations side of your dealership, if run efficiently, should support the balance of the dealership. Since 90 percent of all dealers rose through the dealership ranks via the sales department, the majority of the focus on improvement efforts is usually there. If you have never performed all of the duties in the fixed operations departments, it can be difficult to grasp the profit potential in this department.

Increased gross and net profit, however, can garner the interest of every business owner. Start with effective labor rates. What is your target labor rate, or rate you want to charge for every hour of service? What is your is effective labor rate, or total labor sales revenue divided by total labor hours paid? If your effective labor rate is not at least 90 percent of your target labor rate you have room for improvement.

Start by asking a question posed by Don Reed, of DealerPro Training Services, during his training workshops: “Has your service advisor ever offered a discount on a mechanical labor rate repair before reviewing it with the customer?” If you are shaking your head yes, you join an overwhelming percentage of dealerships today. Why would you allow that to happen? It’s comparable to discounting the price of your vehicle before you ever pencil the deal with the customer. Or telling the special finance customer you don’t need a down payment when he is sitting there with $3,000 in his pocket for his down payment. You wouldn’t allow that to happen in your sales department, so why allow it in your service department?

Why does it happen? The answer: lack of training of your service advisors. Almost every repair facility in the country is using a form of variable labor rates, but not all are utilizing them effectively because they don’t truly understand how to maximize it or have not trained their employees to adhere to it. First establish what type of labor rate you utilize.

There are basically three major forms of variable labor rates used in the industry today. The first is the A,B,C,D technician approach that became widely used 30 to 40 years ago. Technician A is paid, for example, $25/hour turned and is a master ASE certified technician capable of rebuilding an engine or transmission. Each technician after that is less skilled and is paid less money. With this design, a customer is charged based on the technician required to perform the work. Unfortunately, sometimes the skill required is subjected to the opinion of the untrained service advisor which can adversely impact your profits.

The next form of variable labor rates is the labor grid, started in the 1980’s and is still growing in popularity. It is a grid designed for any person in the service department to quickly, accurately and consistently know how much to charge for any job. It is based on the premise that the more hours required to complete a project, the more complex the task. Therefore, more skill is required, translating to higher costs. With this method, technicians can be paid based on any criteria.

The last common form of variable labor rate is based on the type of work performed; meaning each type of work is classified such as competitive maintenance, routine repairs and maintenance, or hi-tech. Maintenance items are those which the dealership competes with several cut-rate service facilities on such as oil changes, battery replacements or belt replacements and are priced well below posted labor rates. Routine repairs are the normal repairs that do not require specialized diagnostic equipment or a high level of training to complete, such as replacing a starter or alternator, and they are billed at the posted hourly rate. Hi-tech work is that which requires a high level of skill, engine overhaul, transmissions, electronic diagnosis, and computer modules and can be generally charged at a rate of 20 to 30 percent higher than the routine repair rate.

Under this form you have the option of paying the technicians each based on their skill and seniority, or due to some significant improvements in software tracking, you can base their pay on the job performed. Until technology caught up with the service department needs, this was such an administrative nightmare to calculate, no one used it.

Once you understand your labor format, you can train your service advisor and hold them accountable. Start with the importance of “why.” The dealership should be able to charge a customer more money for a difficult repair. Your service advisor doesn’t pay the family physician the same price as he pays his anesthesiologist. The anesthesiologist makes much more money because he has more training and skill. The same holds true with your repairs. Your dealership should be able to earn a higher rate for highly skilled jobs.

Once you have crossed that hurdle you can then focus on their selling skills. Your service advisor has one of the most difficult jobs in the dealership. They constantly hear about everything that is wrong with a vehicle. Customers are almost always aggravated at the loss of their transportation. Then to top it all off, the service advisor has very little control over the entire process. They didn’t break the vehicle, and they can’t repair the vehicle. Their job is to make everyone happy in a timely manner. It’s just not easy to do.

The ability to communicate with the customer, technician, service manager and parts department is the number one skill a service advisor needs. Tie that ability with the ability to review manufacturer recommended maintenance with every customer and you have a combination for success. It’s no different than trying to sell an extended warranty to every customer who purchases a vehicle. IF every customer is presented every option every time, sales, gross profits and net profits will increase.

Don’t be misled by thinking that changing or even implementing a variable labor rate strategy is magic and will fix everything in your fixed operations department. There are several other things to review as well. Check these items in your dealership.

Bottlenecks: Where are the bottlenecks in your operation? There are two great ways to find these. The first one is to go spend unannounced time in your service drive from 8 to 8:30 a.m., or in your parts department from 9 to 9:30 a.m. on your busiest day. The other way is to ask. Ask each employee in the fixed operations department to tell you why they can’t get more work done. Lloyd Schiller, president of Dealer Service Corporation, stated, “We do a comprehensive dealership study before we ever arrive at the dealership.” According to Schiller, a confidential survey consisting of 50 yes/no questions and 10 essay questions is sent to all employees and returned to them prior to their visit. “This survey gives us a strong indication of areas that need immediate attention to relieve bottlenecks and improve efficiency.” These changes are usually the easiest to make because the employees already want them made so they can work more efficiently, and for most, that translates to making more money.

Performance: Measure it! You measure closing ratios in the sales department, (in many dealerships) gross profit, and down payments collected, as well as factoring CSI scores in. You must measure performance in fixed operations as well. Reed believes in measuring closing ratios of the service advisors. Total customer pay plus warranty repair orders, divided by the total maintenance sales made today. “This ratio should equal 30 percent, and the really good service advisors are achieving almost 45 percent,” stated Reed.

Evaluate expenses: In many dealerships, fixed operations personnel are paid a good wage for poor to mediocre performance. This is like bringing underachievers to your team and expecting a championship year; it rarely happens. “Service advisors, who are poorly trained, poorly paid and treated like clerks have a low level of productivity, do a poor job of scheduling and do a poor job of communicating with the customer which ultimately leads to poor CSI scores and meager profit margins,” stated Reed. You don’t pay salaries for that in the sales department, so why do it in the service department? Implement pay plans that reward excellent performance based on specific goals and monitor performances.

Evaluate the black hole called policy expense. The majority of policy related issues could have been avoided entirely if the proper communication has taken place in the beginning. Policy is money taken straight from your net profits; it is no different than the service manager coming to your office and asking you to take $300 out of your pocket to give to a stranger.

For a quick evaluation, check your dealership stats to these:

Effective labor rate as percent of posted labor rate >90 percent

Gross profit as a percent of labor sales >70 percent

Gross profit as a percent of parts sales >45 percent

Service advisor closing rate >30 percent

Policy expense as percent of service and parts sales <1 percent

Service absorption rate >100 percent

Service absorption rate is defined as all fixed operations gross profit divided by all dealership overhead including dealer salary. Overhead, also referred to as fixed expenses, includes all expenses that the dealership incurs even if the dealership never opened the sales department this month.

The backbone of the dealership is service, parts and body shop. When you have a good plan, trained people and accountability, it is possible to drive net profits up significantly in this important department. Plan a check up on yours today.

Vol 2, Issue 7